Why In­vestors Shouldn’t be Too Happy with Nes­tle’s Gains

Many of the an­a­lysts have rec­om­mended a sell; Nes­tle may find it dif­fi­cult to el­bow out com­pe­ti­tion which came up dur­ing the Maggi fi­asco

The Economic Times - - Commodities & Markets - Ki­ran.Som­van­shi @times­group.com

Mum­bai: Nes­tle In­dia has been on a re­cov­ery mode on the bourses –– emerg­ing as the top gainer in the BSE FMCG In­dex in the past one month with gains of 13%. The buy­ing in­ter­est has been fu­elled by a spate of good news. Maggi noo­dles passed all safety tests as di­rected by the Supreme Court. The com­pany’s global CEO stated that its In­dia unit is bounc­ing back more quickly than ex­pected af­ter the Maggi ban set­back.

Maggi noo­dles is gain­ing ground and lead­ing the ‘noo­dles’ cat­e­gory with more than 50% mar­ket share. The com­pany has re-launched Maggi veg­etable Atta noo­dles and Maggi Oats Noo­dles. It has also launched a new range of Greek Yo­ghurts as an ex­ten­sion of its Nes­tle a+ dairy brand. Th­ese de­vel­op­ments, un­der the lead­er­ship of the new In­dian head Suresh Narayanan, do in­crease in­vestor con­fi­dence. How­ever, the re­cov­ery is not likely to con­tinue in an­tic­i­pa­tion of an im­pend­ing turn­around. For one, an­a­lysts on the Street are not yet con­vinced. Data from Bloomberg shows that 42% of the an­a­lysts track­ing the stock still have a sell rec­om­men­da­tion on the com­pany’s stock. Citi, KR Chok­sey and ICICI Se­cu­ri­ties have down­graded the stock in the past two weeks. The stock price is still be­low the pre-con­tro­versy le-


ter­math of the Maggi fi­asco, new play­ers like Patan­jali have en­tered the noo­dles cat­e­gory.

It will be dif­fi­cult for Nes­tle to el­bow th­ese out of the mar­ket any time soon. It will en­tail in­creased spend­ing on ad­ver­tis­ing and brand build­ing.

Its strat­egy to launch new prod­ucts in dairy and choco­late seg­ments to di­ver­sify and re­duce de­pen­dence on Maggi noo­dles will take some time to bear fruit.

The firm’s fourth quar­ter num­bers, which will be an­nounced on May 12, would pro­vide fur­ther di­rec­tion to the price.

In­vestors would want to check on the in­crease in rev­enues and im­prove­ment in mar­gins on a se­quen­tial ba­sis.

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